30 October 2023
MCA notifies changes impacting beneficial ownership and dematerialization rules
 
The Ministry of Corporate Affairs (MCA) notified certain amendments to rules by separate notifications dated 27 October 2023. The MCA notified the following amendment rules in pursuance of the said notifications:
  • The Companies (Management and Administration) Second Amendment Rules, 2023 (MA Rules); and
  • The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (PAS Rules).
We have summarized the key amendments in the table below:

Particulars Key Amendments
MA Rules
  • Every company shall designate a person who shall be responsible for furnishing and extending cooperation for providing information to the Registrar or any other authorized officer with respect to a beneficial interest in shares of the company.
  • A company may designate:
    • a company secretary (if it is required to have); or
    • a key managerial personnel (other than company secretary)' or
    • every Director if there is no company secretary or key managerial personnel.
  • Until a company designates persons specifically as aforesaid, the above-mentioned person shall be deemed as a designated person in order of priority.
  • The details of designated persons shall be informed in the annual return of a company.
  • The change in designated person shall be intimated in e-form GNL-2 to the Registrar.
PAS Rules
  • This requires every company that has issued share warrants before the commencement of the Companies Act, 2013 and not converted into shares to inform the Registrar about the details of such share warrants in Form PAS-7 within three months from the commencement of the said rules.
  • This requires the bearers of the share warrants to surrender such warrants to the company and get the shares dematerialized in their account within a period of six months of the commencement of the said rules.
  • This requires a company to place a notice for the bearers of share warrants in Form PAS-8 on the website of the company, if any and shall also publish the same in newspapers.
  • In case the bearer of share warrants does not surrender such warrants within the stipulated time, then a company needs to convert them into dematerialized shares and transfer them to the Investor Education and Protection Fund.
  • This mandates every private limited company (other than small companies) to issue the securities only in dematerialized form and facilitate the dematerialization of all its securities.
  • A private company referred to above is mandated to comply with the dematerialization provision within 18 months from 1 April 2023.
  • After period of 18 months given for compliance, any such private company making any offer for the issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized.
  • Every holder of securities of such private company (after completion of the aforesaid timeline):
    • is required to get securities dematerialized before its transfer;
    • who subscribes to securities issued by such private company shall ensure that all his securities are held in dematerialized form before such subscription.
 
Our Comments
The companies are required to report beneficial ownership to the Registrar. The MA Rules brought a corollary change pursuant to which a person is required to be designated who shall be responsible for furnishing extending cooperation for providing information to the Registrar.

In a major overhaul impacting private companies (other than small companies), the PAS Rules mandate every such private company to dematerialize its securities. It also requires surrendering the share warrants issued before the commencement of the Companies Act, 2013 and not converting into shares to convert into dematerialized securities.

The changes pertaining to the designated person seem to have been introduced to streamline the existing process and empower the Registrar to seek information from such a person. The mandate to dematerialize the securities by private companies would regulate the issue, transfer and buyback of securities in a fair manner. That would also minimize the disputes concerning the issue and transfer of shares, which are abused many times due to the physical nature of shares. However, given the nature of compliance requirements, stakeholders are more likely to feel it as a compliance burden and not as a means to facilitate ease of doing business.
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